Health Heterogeneity, Portfolio Choice and Wealth Inequality

Juergen Jung and Chung Tran

No 2023-07, Working Papers from Towson University, Department of Economics

Abstract: We investigate implications of health heterogeneity for savings, portfolio choice, wealth accumulation and inequality over the lifecycle. Using data from the Panel Study of Income Dynamics (PSID 1984–2019) and the Health and Retirement Study (HRS 1992–2018), we first document the long-lasting effects of poor health during the peak earnings period between age 45–55 on the lifecycle patterns of stock market participation and asset portfolio composition across health status in the US. Next, we quantify the importance of this health-wealth portfolio channel using a structural lifecycle model with elastic labor supply, asset portfolio choice, and household heterogeneity in health status, health expenditure, health insurance, and earnings ability. Our results indicate that the presence of portfolio choice with heterogeneous returns significantly amplifies the effects of poor health on wealth accumulation over the lifecycle and wealth inequality. In the model, health insurance, in addition to its traditional role of mitigating exposure to health expenditure shocks, encourages investments into stocks, resulting in relatively lower wealth gaps at retirement. Our results show that reforming Medicare, Medicaid and employer-sponsored health insurance programs can have large impacts on health-wealth inequality in our multi-asset environment with health risk and non-universal health insurance.

Keywords: Health and income risks; Health insurance; Heterogeneity; Lifecycle savings; Risky and safe assets; Asset portfolio; Inequality. (search for similar items in EconPapers)
JEL-codes: E21 G41 G51 G52 H21 I13 I14 (search for similar items in EconPapers)
Pages: 140 pages
Date: 2023-09, Revised 2024-07
New Economics Papers: this item is included in nep-age, nep-dge and nep-ger
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http://webapps.towson.edu/cbe/economics/workingpapers/2023-07.pdf First version, 2023 (application/pdf)

Related works:
Working Paper: Health Heterogeneity, Portfolio Choice and Wealth Inequality (2024)
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Persistent link: https://EconPapers.repec.org/RePEc:tow:wpaper:2023-07

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